Asymmetric Effects of Trade Openness and National Income on Government Size in BRICS Countries: New Evidence for Wagner’s Law

Abstract

The growing economic prominence of BRICS nations (Brazil, Russia, India, China, and South Africa) has attracted considerable attention to the macroeconomic dynamics driving their development. As these economies grow rapidly and become more integrated into global markets, it becomes increasingly difficult to balance economic growth, trade liberalization, and sustainable fiscal policies. Government size, a key factor in fiscal management, tends to increase with national income (as suggested by Wagner’s Law) and in response to trade openness (as outlined by the Compensation Hypothesis). Understanding these dynamics is crucial due to the unique fiscal pressures and global competitiveness faced by BRICS countries. This study investigates the validity of Wagner’s law and the Compensation Hypothesis in the context of BRICS. Using a panel nonlinear autoregressive distributed lag model on annual panel data from 1999 to 2023, our findings confirm Wagner’s law, showing a positive relationship between economic growth and government size. Additionally, the results support the Compensation Hypothesis, indicating that trade openness enhances government size. This study underscores the potential trade-offs between promoting economic growth and trade liberalization, as these strategies may inadvertently expand the government sector and affect fiscal stability. As BRICS economies continue to integrate into global markets, this research contributes to the discussion on Wagner’s law and trade openness, offering new insights into sustainable fiscal policies, government expenditure optimization, and the pursuit of global competitiveness and economic growth within the BRICS framework.